After Austerity, British Economy Declared World's Fastest-Growing

Sometimes economics are turned on their head. Now, for years, Britain has had controversial austerity measures in place. Olivier Blanchard, the International Monetary Fund's chief economist, likened them to playing with fire. This past week, the IMF published its World Economic Forecast and concluded the fastest-growing economy of any rich country in the world is Britain's. Britain's Chancellor of the Exchequer, George Osborne, led the U.K.'s austerity measures.

He didn't tell the IMF meeting in Washington, D.C. this week, I told you so, but he did say that the government's plan succeeded despite warnings from some. We're joined by Simon Johnson. He's a former IMF chief economist. Thanks so much for being with us.

SIMON JOHNSON: My pleasure.

SIMON: Did the IMF get it wrong? What do you make of these figures?

JOHNSON: Well, certainly, on the narrow, specific and fair criteria of the forecast for growth of this year, the IMF has changed its mind. They've revised up the growth. They haven't completely thrown in the towel. Their forecast for the fourth quarter, on fourth quarter growth for next year is still quite low - only 1.8 percent. But there's no question they've conceded that this year that they were wrong and the chancellor was right.

SIMON: Help us understand those austerity measures because of course, we've seen segments of the Parliamentary debate here. And I'll encapsulate it in the simplest way. You have people in the Labour Party saying these cuts are draconian. They're ruining the vitality of our nation. And you have people in the Tory-Liberal coalition who are saying they're necessary and wise.

JOHNSON: Well, that has been the debate. I think they - the cuts have been a little exaggerated in terms of their immediate impact. And I would also stress that the other half of macroeconomic policy, which is monetary policy, which is what the central bank does, the Bank of England, in that case, has been quite different from austerity. They've got their foot on the gas. So in this monetary policy versus fiscal policy, the easy credit is what has prevailed. The budget tightening, not so much.

SIMON: So let's understand. There's the budget tightenings in the government budget, but on the other hand, access to capital has been freer?

JOHNSON: Access to credit...

SIMON: Yeah.

JOHNSON: ...So the interest rates, your ability to borrow. And the chancellor has put a lot of emphasis on providing credit to new home buyers. House prices are up quite steeply in some parts of the U.K., which gives everyone a short-term feeling of prosperity, and maybe it encourages them to spend. Where that leads to five years down the road is another question.

SIMON: What do you think politicians are going to make of this? And I mean in the U.S. as much as the U.K.

JOHNSON: Well, it's interesting. A couple of years ago, the U.K. debate about austerity was quite relevant to the United States. Now I think it seems very distant. We've somewhat put our budget woes behind us. Now, I understand that there's no perfect long-term budget deal.

SIMON: Yeah.

JOHNSON: I don't think you get that in American politics. But the moment...

SIMON: But the sequester has become a way of life, as opposed to something that we'll have to get rid of it as soon as we can get an agreement.

JOHNSON: That's right. We have a very messy, you might even say disorganized, approach to fiscal policy in this country, no question. But the idea of massive additional budget cuts being needed or on anyone's immediate agenda, I think that has completely faded. Our economy is recovering. Our tax revenues are up. The budget spending has been tilted a little bit in terms of its future projections. So I think the U.K. debate will not resonate at this moment in the United States.

SIMON: Well, what about in Europe, though?

JOHNSON: Well, Europe has some other problems, very big problems, recovering from their own sovereign debt crisis. The growth forecast in Europe is still very weak. That's the IMF forecast and the European's own forecast. And now we have this new shadow of potential disruptions to gas supplies from Russia because of the Russia-Ukraine relationship. That's the new wildcard. And if the relationship with Russia gets worse and you get into any kind of tit-for-tat sanctions, it's the Europeans who are vulnerable to some sort of negative impact on their economy much more than, say, the United States.

SIMON: How does the growth rate in Britain compare to that of the U.S. right now?

JOHNSON: Well, the forecast for this year in the U.K. is higher than for the United States. But looking next year, looking to 2015, the IMF and other people are forecasting that the U.S. will pull ahead. So this moment of British leadership on the growth may be quite transitory.

SIMON: Simon Johnson, formerly chief economist at the IMF, now a professor with the MIT Sloan School of Management and senior fellow at the Peterson Institute for International Economics. Thanks very much for taking a few moments of time away from your title to speak with us.